New fiscal, old flaws

LAHORE: As the new fiscal enters its second week the dairy, auto, and capital market gurus are singing new budget’s praises, while traders, industrialists, and jewelers are protesting the measures.

Those appreciating government policies are the ones that got relief in the budget or have the taxes imposed on them withdrawn. The traders also got a big relief as the government withdrew the withholding tax on cash withdrawals from banks. They are worried about the clauses that arm the tax regulator to arrest those that failed to deposit their due taxes despite notices sent to them. This is something new in Pakistan although tax defaulters or under-fillers of tax returns are frequently put behind bars in many developed and developing economies. Tax evasion is a criminal offence in many countries. The tax evaders in Pakistan consider it as a minor deviation from rules. If caught evading taxes they drag their cases in civil courts for years. The tax collectors have no powers but just to issue notices consider it worthwhile to join hands with tax evaders by extracting rent for their misdeeds. The government though has already diluted the option of linking the arrests to the approval of the Finance Minister. How many officers would adopt this route? Even the industrialists are opposing the powers of Federal Board of Revenue (FBR) officers to arrest tax defaulters.

The government reduced or abolished import duties on numerous raw materials used by both export and domestic industries. But the constant increase in power tariff, gas shortages and petroleum rates have nullified the advantage for the domestic industries at least. Our government lacks courage to tackle the power and gas issues prudently. We are supplying gas to the exporting industries at highly subsidised rates while denying gas to the power sector. The efficiency of power sector plants is two times higher than the efficiencies of the power generators installed by the exporting industries. Ideally the efficient power sector should be given preference over captive power producers. The cost of power production would be the same as the inefficient captive power produced by exporters after hefty subsidies. All the power produced from the gas based power plants could be supplied to the exporting sectors at the cost of the producer. There would be no need for subsidy.

This is easier said than done. The power distribution system in our country is plagued with corruption. The exporters do not trust the power distributors to supply them power smoothly. They have sensitive equipment that might get damaged due to erratic supplies. Moreover unscheduled disruptions cause huge production losses as well. These uneven and erratic supplies are a problem in Pakistan only. The power system around the world is designed to ensure smooth and seamless power to all consumers. The issue in Pakistan is not in the system but in the corrupt culture prevailing in the power sector. The state regulators’ orders not to cut power to industries without any schedule are fully complied by the distributors. They manage the shortages by diverting load shedding to other segments. But there is an issue of temporary outages that could occur in any power system. The outages are very rare if the system is managed properly. The corrupt staff takes a hefty rent from the industries to ensure that no outages or low voltage problems occur in an industry.

These corrupt practices could be checked if there is a strong will at the higher (if they are not shareholders in loot). The log of all industries in a particular area would reveal how many industries escaped outages and low voltage and how many suffered (this should include both domestic and exporting industries).

Any sensible investigator would be able to prove that industries escaping outage paid the rent while others did not. Punitive actions would prevent such practices. The industries would not object if they are supplied smooth power at the same rate at which they produce it from their captive generators. This will in fact spare them the burden of regular maintenance of their machines. The reform in the power sector should start from here immediately before moving to other spheres where a lot of manpower and effort would be required. It will save the country a lot of gas as well. As far as curbing corruption of power distribution and generation staff is concerned it would require large manpower and efforts to nail almost every power sector employee that is making a lot of money from corrupt practices.

The jewelers are in fact toeing the same line as that of other traders that do not want to document their businesses. As the pressure from different segments builds up it would be a test for the will of the government to continue with its reform agenda. In the past it used to succumb to public pressure easily.